A recent decision of the Court of Appeal has underlined that lenders can expect little judicial sympathy if their standard forms of guarantee are not watertight. This article appeared in 'Consumer Credit' (October - December 2013) published by the Consumer Credit Trade Association.

In Harvey v Dunbar Assets Plc the lender asked four individuals to sign the same (a “composite”) guarantee to secure substantial funding given to a property development company. Although he did not dispute signing the guarantee, Mr Harvey argued he was nevertheless not liable because the signature of another co-guarantor had allegedly been forged.

 As the document named the four separate guarantors the presumption was they all had to sign before the guarantee could be enforced against any one of them. The court accepted this presumption could be displaced but only if the wording in the guarantee was clear.  As a lending proposition, the Bank obviously intended that should the company fail, it would have the opportunity to recover some of the debt from the individuals. However, its attempt to rely on a “business efficacy” argument was firmly rejected by the following statement from the court - “The Bank's argument that a signatory was bound, even if a co-signatory did not sign, was no more consistent with business common sense than Mr Harvey's argument that he was only intended to be liable under the Guarantee in the event that the three other intended guarantors in fact signed”.

  After scrutinising the particular wording of the guarantee the Court found that Mr Harvey had only agreed to be liable as a guarantor if each of the other three were liable as well. To be valid, the guarantee had to be signed by all four.

 The inclusion in the guarantee of familiar clauses which would have allowed the Bank to subsequently release the co – guarantor from his liability (had he in fact signed) but still pursue Mr Harvey, did not assist. If   one of the other three  did not sign , Mr Harvey was never  a guarantor in the first place and hence incurred no liability to be released from.

 The solution is for the guarantee to make it explicit that a guarantor’s liability arises as soon as he/ she signs and that this liability is not conditional on any other named guarantor signing.

 Lenders need to review the fine print of their guarantees to ensure possible loopholes are closed by clear and precise wording.